An asset can be defined as anything that which can be bought, sold or exchanged; and an asset class is nothing but

a category of an asset. An asset class is a group of securities that have similar financial characteristics. There are many asset classes but the most traditional and popular ones are cash, bonds and shares, but many assets are also considered as investments. These are commodities, art, classic cars and wines. In recent years there has been a rise or increase of interest in alternative asset classes such as commercial property. ‘Modern alternatives’ which includes investments in various mutual funds, securities etc. which are absolute return funds are also becoming more and more popular. Thus the various asset classes are as follows: 1. Real estate 2. Mutual funds 3. Commodities 4. Shares 5. Securities and Bonds 6. Money market 7. Fixed deposits 8. Public Provident Fund 9. Post savings 10. Insurance 11. Arts 1) Bonds: A loan made by an investor to a government or a company is called as ‘bond’. It is also referred to as ‘fixed income’ or ‘fixed interest’ investment. In return for the money that has been invested by the investor the borrower agrees to pay a certain rate of interest and repay the amount of loan at the end of the pre agreed period or maturity date.

Shares generally have a high risk-reward profile than cash or bonds.e.  Corporate bonds: Corporate bonds are issued by companies mainly to finance or expand operations.There are mainly two types of bonds:  Government bonds: As the name suggests these bonds are issued by the government itself. Benefits: 50  Over the years. These bonds are traditionally considered to be the ‘safest’ type of bond as they are backed by the government guarantees and are generally easy to buy and sell. Shares: Shares represent ownership stakes in the companies that issue them. commercial property and cash investments. bond prices fall and vice versa. as well as security of capital if bonds are held to the date of maturity and there are no defaults by the issuers i. Risks:  There is a risk that the issuer may default on the loan and the probability of this happening is directly dependent on the credit worthiness of the investor. shares have outperformed other asset classes . Generally the returns on these bonds are higher than the government bonds but they also carry a higher level of risk. he becomes a part owner of the company and may have a right to vote on key decisions and also share profits through the payment of dividends. the investor. They have also had a very high volatility of returns. Shares often have proved to be the best performing asset class giving returns greater than bonds.  Fluctuations in interest rates can affect the value of a bond and generally when the interest rates rise. When a person buys shares. Benefits:  Bonds can offer a steady and predictable income.

When all these raw materials are grouped together. sugar etc. Benefits:  Lack of supply and growing demand has created a very strong market in certain commodities such as oil and basic metals. Risks:  High volatility of stock market and have experienced both extreme highs and lows. Similar to shares.  May not be possible to recover the original amount invested as value of shares can go up as well as down. wheat. cotton. corn. moderate investment in commodity market apart from shares and various other portfolios can reduce the overall risk of the investment. coffee. So. Commodities at times can be a very good investment as they differently than other asset classes. commodities forms an asset class. metals like gold and silver. Commodity: Commodities are mainly raw materials such as energy. when the profits of the company in which investment has been done continue to increase then the demand of its shares is likely to grow and its share prices more likely to rise. That means there can be a benefit to diversing a portfolio by making a modest allocation to commodities.over the long-term  Shares can also provide a combination of income (through dividend payments) and capital growth i.  There are chances of winding up of a company and the shareholders are last to get their money invested in that company. 52  Commodities are a very effective means to branch out investment risk because they move differently from shares and .e. commodities also have a high riskreturn profile.

jute. potatoes. These include cereals. jute products. agri-commodities including grains. Risks:  Commodity prices can be volatile so it is necessary to diversify investment over a wide range of sectors. unlike shares and bonds. zinc etc. pulses. mineral and fossil sectors have been sanctioned for futures trading. The trade is regulated by the Forward Markets Commission. pulses. Trading in commodities futures is quite similar to equity futures trading. real-estate and bonds. silver. Commodity trading is nothing but trading in commodity spot and derivatives (futures). Commodity derivatives are 53 traded on the National Commodity and Derivative Exchange (NCDEX) and the Multi-Commodity Exchange (MCX). oils and oilseeds.000-15. Now.  Commodities.  Commodity prices suffer whenever the economic growth is slowing down. . un-ginned cotton. Commodity market is a market where raw or primary products are traded. silver. spices. oils. oilseeds. All commodities produced in the agriculture. tea. For long the investment universe for Indians consisted of stocks. yet another avenue has opened up — commodity futures. metals and crude are some of the commodities that these exchanges deal in. onions. ginned cotton. gur. mentha oil. Various metals are also traded such as gold.000 crore. react well to unexpected inflation – so they can be a good way to protect the portfolio. sugar. jewellery. coffee.bonds. The commodity market in India gives a daily average turnover of Rs 12. Gold.

In fact this is the stage which everyone wishes to have in the stock market. Commodities generally carry a high risk and attract only those investors who are willing to take higher risks and earn money. he does not give loss cheque to the broker.  The trader starts to make profits: This stage where a trader makes consistent profit i. Though it is four years since the government issued a notification allowing futures trading. among others. 80% of them finish of at the first stage only and after an year or two find that the stock market or commodity market is not their cup of tea. commodities attract but lukewarm interest among retail investors. and bullion. Now these traders are ready for the 3rd stage. Common misgivings among investors are that “commodities are risky” and that “they are difficult to understand”. A cycle of fear of loses and the greed to earn more may make him initially give loses. So in the 2nd stage only the 20% investors try to break even in their 55 trading and quite a lot of them are able to have control over their fear and greed with a result that they stop giving losses.e.  Trader begins to make no profit no loss: It is seen that out of the total investors who enter the first stage. It is commonly assumed that every trader passes through three stages and they are:  Every trader loses initially: Every investor who is trading for the first time or is a novice in the commodity market or stock market initially loses as he might not be able to have control over his greed and fear. But it is strongly believed that anybody who wishes to come to the 3 rd Stage has to pass through the above 2 stages. Analysis of Commodity market: .petrochemicals. 54 A large number of brokerage firms are yet to open divisions for the commodities market.

A large number of different market players participate in buying and selling activities in the market based on diverse domestic and global information. facilitates offsetting the transactions without impacting on physical goods until the expiry of a contract. demand and supply. Investors must understand the demand cycles those commodities go through and should have a view on what factors may affect this. What Commodity Futures Market does: A well-developed and effective commodity futures market. Any investor who wants to take advantage of price movements and wishes to vary his portfolio can invest in commodities. climatic conditions and other market related information. All these factors put together result in efficient price discovery as a result of large number of buyers . identify buying or selling opportunities assessing the extent of market turnarounds. such as price.  Technical focus on the formation of charts and formula to capture major and minor trends. Investments must be made in those commodities which can be easily analyzed rather than speculate across products which the investor does not have any idea. unlike physical market. 56 Commodities allow a portfolio to improve overall return at the same level of risk.There are two primary approaches of analyzing commodity market: Fundamentals focus on financial and economic theories as well as political developments to determine forces of demand and supply.

unlike in the case of the equity market where a wide spectrum of factors — earnings. But commodity markets are easier to understand than one imagines. as information flows in. but do not have a systematic causal influence on prices. investors keep away from commodities. A mismatch between them causes price changes. Commodities. in general. sugar. but it quickly reverts to long-run equilibrium price. This has been validated using statistical tools based on historical data. speculators play a role in providing liquidity to the markets and may sometimes benefits from price movements. Also unlike equities. The risk tag Investment in any asset class — commodities. Though to a certain extent. commodity prices are driven by geopolitics and duty structures. are tagged high-risk. reflecting fundamentals of the respective commodity. In futures market. unable to understand the market. they most often reflect the underlying demand-supply situation. Equities versus commodities Unlike equities. For one. interest rates and risk premiums — drives prices. bonds or treasury bills — carries its own risk element. stocks. For instance. there are relatively few factors at play. commodities do not carry operational and management risks. . commodities touch every day life.and sellers transacting in the futures market. Price behavior of a commodity in the futures market might show some aberrations reacting to the element of speculation and ‘bandwagon effect’ inherent in any market. free cash flows. Yet.

In the money market banks lend to and borrow from each other. though fluctuate but the rate of fluctuation is very minimal as compared to other funds but they are not guaranteed. A major difference is that the information availability on supply and demand cycles in commodity markets is not as robust and controlled as the equity market. short term financial instruments such as certificate of deposits (CDs) or enter into agreements such as repurchase agreements (repos). It provides short to medium term liquidity. These funds are mostly purchased by corporate and individual investors who wish to put their . Money Market funds: Money market funds better known as liquid funds provide stability. The risk element is the possibility of the actual varying. Commodity trading is done in the form of futures and that throws up a huge potential for profit and loss as it involves predictions of the future and hence uncertainty and risk.Standard deviation is the common tool used to quantify risk. but it reflects volatility more. liquidity. Investing in money market funds means the fund manager invests in ‘cash’ assets such as treasury bills. The return on these funds. on the negative side. Money Market: It is a financial market for short term borrowing and lending mostly for thirteen months. capital preservation and most importantly high interest rates than bank accounts. from the expected. certificates of deposit and commercial papers.

these funds generally invest in fixed income securities such as bonds. Balanced funds: As the name suggests. these funds aim for balance and hence are made up of a mixture of equities and debt instruments. while equities provide the potential for capital appreciation. The debt or bond element of the fund provides a level of income and acts as the safety net during dynamic periods in the market. 61 Opportunities for capital appreciation are limited and the downside is that as interest rates fluctuate.surplus money in a fund for a short period. Debt funds: The aim of debt or income funds is to make regular payments to its investors. if it is not financially healthy. the net asset value or NAV of the fund could follow suit – if interest rates fall. However. although dividends can be reinvested to buy more units of the fund. To provide you with a steady income. These funds are mostly suitable for investors who are looking for a moderate capital appreciation as the risk is relatively low as compared to other funds. There is also a risk that a company issuing a bond may default on its payment. government securities (gilts) and money market instruments. The investors interested in these types of funds are those who seek to grow their capital and get regular income. if the fund invests in . the NAV is likely to increase and vice versa. corporate debentures.

Treasury Bills 2. Any dividends received by the fund can be reinvested by the fund manager to provide further growth or paid to investors.There are different types of Treasury bills based on the maturity period and utility of the issuance like. at present. Types of Treasury Bills: . Both risk and returns are high but they could be a good investment if you have a long-term perspective and can stay invested for at least five years. The Treasury Bills are commonly referred as T-bills.government securities there is little risk of the government defaulting on its payment. Equity funds Equity funds (often described as growth funds) aims to provide capital growth by investing in the shares of individual companies. Call or Notice money 5. The T-bills are issued by the Government/Reserve Bank of India. the Treasury bills are the 91-days. Depending on the fund’s objective. Any other instruments as may be permitted by RBI/SEBI from time to time 1.Treasury Bills are money market instruments to finance the short term requirements of the Government of India. 12months Treasury bills etc. this could range from large blue-chip organizations to small and new businesses. Certificate of deposit 4. Commercial papers 3. ad-hoc Treasury bills. 62 Money market includes the following:1. Treasury bills:Meaning: . 3months. . The return to the investor is the difference between the maturity value and the issue price. These are discounted securities and thus are issued at a discount to face value. and 364days Treasury bills. In India.

Mutual funds.  Repayment:.  Day Count: . Foreign Institutional Investors. the bidder has to obtain the treasury bills at the price quoted by him. 66 . Types of auctions: Multiple Price Based or French Auction: Under this method. Provident Funds are eligible to bid and purchase Treasury bills. Financial institutions. Primary dealers.For Treasury bills the day count is taken as 365 days.The Treasury bills are repaid at par on the expiry of their tenor at the office of the Reserve Bank of India  Availability: . 25000/.  Eligibility:. all bids equal to or above the cut-off price are accepted. Minimum amount of bids for Treasury bills are to be made for a minimum amount of Rs. Companies. Primary Market In the primary market the Treasury Bills are issued by auction technique. However.Benefits of investment in Treasury Bills: No tax deducted at source  Zero default risk being sovereign paper  Highly liquid money market instrument  Better returns especially in the short term  Transparency  Simplified statement  High degree of tradability and active secondary market facilities meeting unplanned fund requirements.All entities registered in India like Banks. Corporate bodies. Features: Form: .only and in multiples thereof.The Treasury bills are issued in a form of a promissory note in physical form or by credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialized form. Firms. State Governments.All the Treasury bills are highly liquid instruments available both in the primary and secondary market. This method is followed in the case of 364days treasury bills and is valid only for competitive bidders. Partnership firms.

 Uniform Price Based or Dutch auction: Under this system. entry & exit Tredepasury Bills . the returns on treasury bills are much higher as compared to . unlike the Multiple Price based method. This method is applicable in the case of 91 days treasury bills only. one can purchase treasury bills of different maturities as per requirements so as to match with the respective outflow of funds. financial Institutions. mutual funds. Advantages: Market related yields  Ideal matching for funds management particularly for short term tenors of less than 15 days  Transparency in operations as the transactions would be put through Reserve Bank of India’s SGL or Client’s Gilt account only. Banks do not pay any interest on fixed deposits of less than 15 days. This helps in deployment of idle funds for very short periods as well. However. Secondary Market The major participants in the secondary market are scheduled banks.An Effective Cash Management Product Treasury Bills are very useful instruments to deploy short term surpluses depending upon the availability and requirement. have also begun investing their short term funds in treasury bills. since every week there is a 91 days treasury bills maturing and every fortnight a 364 days treasury bills maturing. Further.  Certainty in terms of availability. the bidder obtains the treasury bills at the cut-off price and not the price quoted by him. Other entities like cooperative and regional rural banks. Primary dealers.off level.  Two way quotes offered by primary dealers for purchase and sale of treasury bills. or balances maintained in current accounts. At times when the liquidity in the economy is tight. whereas treasury bills can be purchased for any number of days depending on the requirements. insurance companies and corporate treasuries. all the bids equal to or above the cut-off price are accepted at the cut. educational and religious trusts etc. Even funds which are kept in current accounts can be deployed in treasury bills to maximize returns.

These are sold directly by the issuers to the investors or else placed by borrowers through agents / brokers etc. Commercial Papers are issued in the form of discount to the face value. When issued in the physical form Commercial Papers are issued in the form of Usance Promissory Note. better yields and availability for very short tenors. another important advantage of treasury bills over bank deposits is that the surplus cash can be invested depending upon the staggered requirements. Certificate of Deposit:CDs are short-term borrowings in the form of Usance Promissory Notes having a maturity of not less than 15 days up to a maximum of one year. Commercial Papers: Commercial papers are short term borrowings by Corporate. . FI’s. Companies use CPs to save interest costs. 70 3. 5 Lac thereafter  Maturity is 15 days to 1 year  Unsecured and backed by credit of the issuing company  Can be issued with or without Backstop facility of Bank / FI Commercial Papers can be issued in both physical and demat form. 69  Issued subject to minimum of Rs 5 lakhs and in the multiples of Rs. Commercial Papers are short-term unsecured borrowings by reputed companies that are financially strong and carry a high credit rating. Features: Commercial Papers when issued in physical form are negotiable by endorsement and delivery and hence highly flexible instruments. 2.bank deposits even for longer term. PD’s from Money Market. Besides.

72  To meet the CRR & SLR mandatory requirements as stipulated by the Central bank.  To meet sudden demand for funds arising out of large .  Issued to individuals. The money that is lent for one day in this market is known as "Call Money". funds and associations. Minimum period for a bank CD is fifteen days. Call or Notice money:The call money market is an integral part of the Indian Money Market.  Freely transferable by endorsement and delivery. 71 These are issued in denominations of Rs. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits. 4. Banks borrow in this money market for the following purpose:  To fill the gaps or temporary mismatches in funds. They are like bank term deposits accounts.CD is subject to payment of Stamp Duty under Indian Stamp Act. Features: All scheduled banks (except RRBs and Co-operative banks) are eligible to issue CDs.  They are issued at a discount rate freely determined by the issuer and the market/investors. Bank CDs have maturity up to one year. trusts. Financial Institutions are allowed to issue CDs for a period between 1 year and up to 3 years. The loans are of short-term duration varying from 1 to 14 days. 1 Lac thereafter. 1899 (Central Act). where the day-to-day surplus funds (mostly of banks) are traded. corporations. and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money". Term Money refers to Money lent for 15 days or more in the InterBank Market. CDs issued by AIFI are also issued in physical form (in the form of Usance promissory note) and is issued at a discount to the face value.5 Lacs and Rs. At present CDs are issued in physical form (UPN).

ICICI and mutual funds etc. GIC. UTI. IDBI.RBI (through LAF) Banks.outflows. Thus call money usually serves the role of equilibrating the short-term liquidity position of banks. NABARD. Call Money Market Participants:  Those who can both borrow as well as lend in the market . PDs  Those who can only lend Financial institutions-LIC. .

Sign up to vote on this title
UsefulNot useful